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ALI VELSHI, CNN ANCHOR: I have been warning you of a coming economic storm, possibly another recession in the United States. Now some of you don't believe me. But now you will.

I'm Ali Velshi and this is YOUR MONEY.

The economic storm I've been warning you about has now moved beyond what others can do to us. The danger now, and it is a real danger, is what we're doing to ourselves. The scorched earth partisan politics in Washington could push America over a fiscal cliff and quite possibly into a recession if Congress doesn't act.

Economists now say that the so-called fiscal cliff has now overtaken Europe as the biggest threat to the U.S. economy. In other words, our homegrown storm has a bigger chance of causing a hurricane here than the actual hurricane that's blowing our way from Europe.

Now I've been berating Congress on this show to pass legislation now to head off a series of tax increases and spending cuts mandated to take effect on January 1st because Congress couldn't come up with a better deal to raise the nation's debt limit last year. I am not alone in my calls. The Federal Reserve chairman and the International Monetary Fund are warning Congress to act before it's too late.

And if you get hit by another recession, you'll join me in pointing my finger directly at the political partisanship that has poisoned your path to economic stability and prosperity.

Now if I were a politician, I would not want to be party to anything that pushes the United States into a recession. But many of your elected politicians don't have the political will to compromise and to reach across party lines and agree on measures to reduce our debt. Not this close to a national election, not a chance.

That's not enough to persuade you, let's take the most recent snapshot of the economy. There is one thing I understand, I don't understand much, but I understand the economy. Thirty-four thousand more people filed for unemployment claims last week, 12.6 million of you are out of work. Housing prices are flat. And gas prices are up 11 cents in the last two weeks.

We've got enough problems to worry about without going over a fiscal cliff.

CHRISTINE ROMANS, HOST, YOUR BOTTOM LINE: It is something that has replaced Europe as the biggest threat to the recovery here. "The Washington Post" puts it like this. The the main threat to the U.S., shifting from what others may do to us to what we're doing to ourselves.

What we are doing, huge automatic tax increases. On January 1st next year the Bush tax cuts, the alternative minimum tax, those expire. Those tax cuts expire. Also, if do you nothing, that means if nothing changes your taxes will likely go up. At the same time, Medicare doctor pay will also go down.

On top of those tax increases, the very same moment massive cuts to federal spending.

If current law stays in place, Ali, the government must slash $1 trillion over nine years from federal spending. Half from defense, half from nondefense departments. The Bipartisan Policy Center says it will cost about a million jobs over two years, one million jobs over two years. Not just government jobs, jobs in the private sector, many of them contractors working with the government and they are quite frankly right now trying to figure out how to prepare those layoff notices.

The economy is barely growing right now, 1.7 percent if you average out the first half of 2012. What we've seen and what the forecast is. The second half of 2012, 2.5 percent. This is a UBS forecast and some say, quite frankly, it might be too optimistic.

Take a look here. You warned of that recession, Ali?

VELSHI: Yes.

ROMANS: If the economy goes off the fiscal cliff, the Congressional Budget Office says GDP will shrink at a rate of 1.3 percent in the first half of the year. That's unless we back away from the fiscal cliff. That is a recession.

VELSHI: Right.

ROMANS: And it's uncharacteristic of the CBO to make a call like that. Fed chairman Ben Bernanke again warned Congress again this week about this potential.

VELSHI: Yes.

ROMANS: What makes it so scary, it's all happening in an election year. No one expects Congress to deal with any of these big issues until after November 6th. Also approaching the debt ceiling limit again. We could hit that as early as December. All of this is on Congress' to-do list in an election year -- Ali.

VELSHI: And remember, when people say they want smaller government, you brought out a good point, particular in defense spending. Smaller -- it's not government employees. It's government contracts to private sector workers in many cases.

ROMANS: Absolutely.

VELSHI: Christine, don't go far. This is a --

ROMANS: I won't.

VELSHI: A hot topic. What would that recession look like? CNN contributor and conservative commentator Will Cain joins us now, and Bill Gross is the founder and co-chief investment officer of PIMCO. It is the world's largest investor in bonds.

Bill, I'll get to you in a second. Good to see you.

Will, I've investigated the origins of your name. It turns out that Will Cain is Gaelic for ostrich with head in sand.

(LAUGHTER)

VELSHI: Because you think we should do nothing.

WILL CAIN, CNN CONTRIBUTOR: I don't think we should do nothing. I think the obviousness of your call for action on the fiscal cliff is clear to everyone regardless of their political ideology. However, Ali, I don't want you to be nearsighted. I fear you're being nearsighted.

VELSHI: Right.

CAIN: Because right around the corner from the fiscal cliff is another problem.

VELSHI: Right.

CAIN: In fact, it's a problem exacerbated by avoiding the fiscal cliff. If I can.

VELSHI: OK.

CAIN: May I show what you I'm talking about?

VELSHI: Go ahead.

(CROSSTALK)

VELSHI: You have a graphic?

CAIN: That's right. From the Congressional Budget Office. This shows the United States' debt-to-GDP ratio.

VELSHI: OK.

CAIN: Right here, this blue line, extending from the green, which is our current situation, shows what happens to our debt-to-GDP ratio should we avoid the fiscal cliff. That is, tax cuts are extended and spending cuts are avoided. Within 30 years we saw 200 percent above GDP.

VELSHI: OK.

CAIN: If we let the fiscal cliff, if we go over it, we keep it at 53 percent of GDP, now look, you go, well, those are numbers. That's debt-to-GDP, that's long term. Let me just say this, frequent guests to this program.

VELSHI: Yes.

CAIN: Ken Rogoff, put out a study and he said.

VELSHI: Yes. He is a Harvard economist.

CAIN: Harvard economist.

VELSHI: Former chief economist with the IMF.

CAIN: That's right. He has said high levels of government debt-to- GDP has a depressing effect on the economy. As much as 24 percent reducing GDP over a 20-year period. You're feeling that. You will feel that.

VELSHI: True.

CAIN: All I'm saying is, the conclusion is Lord make me chaste just not yet.

VELSHI: Yes.

(LAUGHTER)

VELSHI: I don't really want to discuss your chastity on television.

Bill Gross -- let's bring Bill into this conversation. A very compelling discussion about how you want to keep, you know, debt-to- GDP ratios at a -- in a -- you know, in a tight relationship except that you can have low debt and low GDP as well. You look at this. You are -- you are investors in bonds. U.S. -- the U.S. is still -- got the advantage of borrowing money very inexpensively. Give me your picture on this.

BILL GROSS, FOUNDER, PIMCO: Well, I think Will has a point, Ali. But I think I'm on your side and Christine's side in terms of the need to sort of go carefully. I mean the American economy like a drug addict has become hooked on credit and debt in both public and private economies. But addicts can be cured cold turkey. That's dangerous as we know.

And so you need to prescribe some method both from the standpoint of the Federal Reserve and from Washington's fiscal policy, which is what you speak to. And that, to me, means gradually reducing deficits from 9 to 8 to 7 percent of GDP every year with a -- with a focus, I think, on shifting from consumption to investment spending.

ROMANS: I don't even see the incremental approach here. That's what's interesting to me, Ali, is it's all or nothing.

VELSHI: That's right.

ROMANS: It's either the fiscal cliff or 200 percent GDP -- debt-to- GDP ratio. I mean what we need are policymakers who can signal to the world and signal to Americans that they get it and they're going to try to fix it slowly and responsibly. I don't think anybody has heard that, right?

VELSHI: No, of course not. And that is the call here. The call is to get out there as voters and look for and support those people who are running in your districts, not because they are Democrats, not because they're Republicans, not because they say get your hands off my entitlements but because they are prepared to come up with a middle ground, which is going to be the only solution.

So Will Cain accuses me of coming up with a new problem as I solve the most immediate problem. And I wonder whether you ever played Asteroids.

(LAUGHTER)

VELSHI: Because, because when that asteroid is coming at you, you've got to shoot it. It's irrelevant the fact that there are 86 more asteroids coming. You've got to shoot that one then you got to shoot the next one.

I would love to not live in a world where we're playing economic asteroids but we are.

CAIN: I agree with you 100 percent. You know, fortunately for my credibility, I agree with Ali, Christine, and Bill Gross.

(LAUGHTER)

CAIN: But unfortunate for our ratings, that is. What -- the issue here then is what is that middle ground that Christine speaks of.

VELSHI: Yes. What is it?

CAIN: How do we get from my long-term solution to your short-term emergency measures?

VELSHI: Right. And --

CAIN: How do we get to bridge that gap?

VELSHI: Right. Sort both of them out?

CAIN: That's right. And what I would suggest to you is we know the path. We just have to make politicians do it.

VELSHI: Bill Gross, let me ask you this. If we have this middle ground, this approach where we reduce debt over time or we have some indication that we reduce debt over time, and yet we engage in measures that will increase economic growth, which is code for creating jobs. That's ultimately what we need to do generally speaking to create jobs.

How will the bond markets react? Because the fear that people have is that at some point everybody's attention is going to turn to the United States. It's been busy with Europe. And they're going to say, you guys have unsustainable debt and your interest rates are going to go way up.

GROSS: I think that's a possibility. As you point out, at the moment, treasures are being bought by not only the Federal Reserve but by the Chinese and others with the confidence that as we call it, the United States is the cleanest dirty shirt in the world.

You know, to a certain extent, you know, if we continue to run 8, 9, 10 percent deficits as a percentage of GDP, then, as Will points out, you know, at some point our debt-to-GDP rises to levels of Greece.

VELSHI: OK. Hold that thought because we're getting to solutions now. We're going to pick up right where we left off when we come back.

Plus later I'm going to tell you about another part of the storm that you need to know about. The people who should be watching out for you are not. And that makes you want to keep your money in your mattress. And that holds you back from achieving all the economic prosperity you can.

When I come back, I'll tell you about how safe you aren't two years after the passage of the biggest financial regulation in 75 years.

(COMMERCIAL BREAK)

VELSHI: I'm rejoined by CNN contributor and conservative Will Cain as well as Bill Gross, the founder and co-chief investment officer of PIMCO. And Christine Romans is with us as well. I want to pick up where we left off.

Christine, surprising amount of agreement. And this is actually not that surprising. I think everybody in America, with maybe a very few exceptions, understand we need tax reform.

ROMANS: Right.

VELSHI: We need debt reform. We need to keep out debt under control. We need economic growth. We need to solve the jobs problem. And I don't think there's anybody who would like us to go over the fiscal cliff. Why is this problem not getting solved?

ROMANS: The honest part of this is that everyone's got to give something up. And when you have tax reform that means some people are going to give something up. Like some people could give up the mortgage interest deduction.

VELSHI: True.

ROMANS: Some people could give up some of their -- some of their retirement benefits. I mean I don't even know what's all on the table to give up. But no one wants to give anything up. And in a way, it's almost like America is living the "me more now" bubble era.

VELSHI: Yes.

ROMANS: No one wants to pay for what we've already spent.

VELSHI: Will?

CAIN: OK. I reject your premise. The fiscal cliff will be avoided. Calvin Coolidge once said if you see 10 problems coming down the road at you, odds are if you stand still, nine will fall in the ditch. I'm telling the fiscal cliff is going to fall in the ditch. Why will it get solved? Because the obviousness of the necessity for it to get solved.

Now in the meantime, while we're peddling around and putting it off until December, will it have negative economic effects? The answer is yes. But to use your analogy one more time, Ali, if we keep playing Asteroid.

VELSHI: Yes.

CAIN: If we keep shooting immediate emergency problems, which is the fiscal cliff, we'll never focus on the long-term problem, which is that entitlement reform.

VELSHI: OK.

CAIN: That tax reform that so necessary.

VELSHI: And, you know, Bill Gross is the smart money on this. He's the guy who deals with the people who buy the bonds. So Christine could be right, I could be right, you could be right. But ultimately, the bet is made in world in which Bill operates.

GROSS: I think the long term is the threat, Ali, in terms of the U.S. bond market and that makes long-term bonds to the extend that we continue to run deficits of 8 and 9 percent, that means higher inflation and ultimately that is a negative for those 20 and 30-year treasuries.

What an investor would want to do to protect himself or herself against that possibility is to buy shorter term securities, to buy three to five-year securities so that inflation couldn't erode their principal so quickly. So, you know, there's a defense mechanism for bond holders, and I think that's gradually taking place. Not only in the United States but elsewhere around the world.

VELSHI: Ultimately, Bill, what it is that people who lend us money, the bond holders, the people who keep America solvent through this crisis, what is the best thing they need to see in your opinion? This is very confusing because right after we got a downgrade and we didn't deal with the debt ceiling, money got cheaper to borrow in the United States which got puzzling for all of us.

What is it that they need to see in order to keep our borrowing rates low for long enough for us to repair some of the damage that we've gone through?

GROSS: Two main things, Ali. One, low inflation. Inflation is an enemy of the bondholder so keep it low. But at the same time, a bondholder wants growth. You know that's typically associated with the stock market. But as we see in Greece and Spain, and other countries in Euro land, the extent that you move negative in terms of growth and your bonds are subject to default. So that's a delicate combination. Low inflation, relatively attractive growth.

I mean, you know, 1 to 2 percent minimum growth in terms of real GDP at a minimum. And that's at the buying edge and playing cutting line that we're experiencing now. So let's have some growth. Let's have low inflation and that combination basically results from gradually reducing deficits over time as opposed to cutting them immediately and producing that recession that the Washington is warning about.

VELSHI: Bill Gross is the founder of PIMCO. Will Cain, a CNN contributor, and our good friend, Christine Romans. Thanks to all of you.

Coming up next, a woman who took on Wall Street and Washington to protect you. She became a target for the banking industry and its Republican defenders in the Senate. When things got too hot, the Obama administration sacrificed her. She couldn't fix the system from the outside. So now she wants in.

Elizabeth Warren right after the break.

(COMMERCIAL BREAK)

VELSHI: It used to be that there were three ways you could find financial prosperity. You could work your way up the ladder, get regular raises, buy a home. But with almost 13 million people officially out of work in the United States, jobs stability is uncertain, growing your income is a path to prosperity is even less certain. So scratch that from the list.

Option two, you get rich off of your home. The home, by the way, that used to go up in value year after year after year. That bubble burst when we over-borrowed and gorged ourselves on cheap credit. When we learned the hard way that home prices don't always go up. When prices fell, they took a big pile of American wealth down with them.

If can you afford a house today, if you have the down payment and the credit score and a steady job, well, low mortgage rates make it a great time to buy. But you will not get rich off your house any time soon.

So what's left? Well, the only remaining legal way to change your economic situation for most people is investing, buying stocks, bonds, mutual funds, exchange traded funds or any other tradable security. Anything other than keeping your money in cash, which earns you nothing. Investing in a smart way was once a potential path to a better life. Even if you did it relatively passively through your 401(k) at work or your pension plan or your IRA, money invested was money you could generally count on to grow over time.

Until 2008. The financial crisis and its aftermath proved that the game was rigged. The deck was stacked. The house held all the cards. Banks inflated profits, they made risky bets that blew up in our faces nearly taking down the global financial system. And the government bailed them out.

And they went back to making billions of dollars for their investors and executives and surprise, surprise, the banks are still behaving badly. Just look at the $6 billion in trading losses at JPMorgan Chase. America's biggest and thought to be safest bank, or the admission by British banking giant, Barclays, that it, along with other banks, manipulated LIBOR, the base rate around which trillions of dollars of loans worldwide are set.

HSBC, Asia's most respected bank, says it's sorry for laundering money. Two guys are in jail for inside trading but most people who gamble with your hard earned money walk free. They lose a little pay, their employers get a fine that they can probably pay with money that comes out of their vending machines.

For every reason I give you to invest, you can give me nine more why you shouldn't. And if I don't win this argument, you don't prosper.

Well, remember Elizabeth Warren? She's best known as a financial advocate, an advocate for financial reform in America. Her willingness to go head-to-head with Wall Street is why the Obama administration brought her in two years ago to get the Consumer Financial Protection Bureau off the ground.

She is now the Democratic candidate for Senate in Massachusetts. I asked her what she sees as the strengths and the weaknesses of our financial system.

(BEGIN VIDEOTAPE)

ELIZABETH WARREN (D), MASSACHUSETTS SENATORIAL CANDIDATE: The strength is the Consumer Financial Protection Bureau. And the reason it's the strength is it has a very clear mission that is to mow down the fine print in credit cards and to stop the cheating on mortgages and to level the playing field and make it easier for families to see what something costs and to make direct comparisons and to pick the one that's the cheapest.

And it has political insulation. It's set up so it can do its work in a professional manner on behalf of the American people. Give them a real voice in Washington.

I think that's the strongest part of Dodd/Frank. I think the places where there are problems under Dodd/Frank are when Dodd/Frank quite reasonably said we're going to give it back to the agencies like the Commodity Futures Trading Commission.

VELSHI: Right.

WARREN: To work out particular regulations to figure out how to regulate the derivatives and so on and so forth.

VELSHI: Yes.

WARREN: How to get them on to a market. The problem was that they did have and then the Republicans in Congress started attacking the regulatory agencies.

VELSHI: Right.

(CROSSTALK)

VELSHI: And that's where your --

WARREN: For your budget --

VELSHI: That's where your problem came in. They said that they can't have you running this body that has this absolute ability to make decisions about -- you know, without what they call congressional oversight. They did let someone else be confirmed. They did let Richard Cordray be confirmed.

What can that body do? The Consumer Financial Protection Bureau. It was a watered down version of what you wrote. Is it helpful?

WARREN: Well, now I do want to say about the consumer agency, as it is set up right now, it's pretty insulated from political influence. And so it's really getting out there right now. It's established a consumer hotline so that people who have a problem with a financial institution or a credit card, a mortgage can call in and get somebody on their side.

It's writing the regulations to make mortgages clearer, take the tricks and traps out of credit cards. It's out there working for service members and for seniors and for students and other groups that have been targeted by lousy credit products.

And right now as it stands, it's got good insulation from the politics of Washington. What is going on is the Republicans have introduced bills to cut its funding, to make it more political and to repeal it outright. In other words, they're assaulting it, trying to make it, trying to weaken it so that it won't be able to do its job.

That's where the real fight is going to be. Does the agency survive as a strong voice for consumers? Or are the Republicans able just -- and their banks.

VELSHI: Yes.

WARREN: Just to be able to mow it down and basically turn it into something weak and useless. VELSHI: Elizabeth, there are only three ways that Americans can prosper. They can either -- their wages can increase and we know historically that has not been happening for low and middle income people. They can -- the value of their home can go up. And while you have worked on protections for mortgages, ultimately it will be a long time before we have a housing recovery.

So the final ways that they can invest prudently in the stock market through mutual funds and that is working against Americans. Every week they find some more evidence of the system being rigged against them.

WARREN: Yes.

VELSHI: We need leadership to say that the American consumer, the American investor, the American home buyer and the American worker comes first. Why is that leadership not coming out of the White House?

WARREN: You know, I -- here's how I see this. You are exactly right. What we need is we need a level playing field, a set of rules that are transparent so that you know when you make an investment the game isn't rigged against you. So that it's not rigged against you in every possible way.

Right now I lay the blame with Congress. Every attempt that Congress has made, the Democrats have introduced to try to get some more accountability into the financial system, the bank lobbyists and their friends have blocked. They said no. We won't do it. And they've engaged in what is really a gorilla war right now. So that after Dodd/Frank passed, it's been the case that the bank lobbyists and their friends in the United States Senate --

VELSHI: Right.

WARREN: -- have gone out and secretly lobbied to try to delay implementation, to try to put holes -- create loopholes in the implementation of the bill, to try to tangle the bill in complexity. In other words, the financial system hasn't changed.

(END VIDEOTAPE)

VELSHI: Coming up next, you heard Elizabeth Warren talk about the controversial Dodd/Frank Act. I'm going to hit that hard when we come back. It's one of the president's landmark pieces of legislation designed to protect you and your finances. It's two years old now but depending on the political wins, it could be watered down or washed out altogether.

I'll speak to the new head of the Consumer Financial Protection Bureau.

(COMMERCIAL BREAK)

VELSHI: I have been telling you a little ad nauseam about a coming economic storm. Congress is not protecting you and it is putting your prosperity at risk. We've been talking about these storm clouds, the fragile U.S. economic recovery, the looming expiration of tax cuts, and the onset of record spending cuts.

In short, the fiscal cliff that we are headed over if Congress doesn't act. But there is another part of the storm you need to know about. The people who should be watching out for you aren't when it comes to the safety of the financial system. There are at least a dozen different federal agencies charged with regulating and monitoring the financial industry. It is a veritable alphabet soup of regulatory acronyms and all of this isn't getting the job done.

Now it's not the fault of these agencies entirely. Some of them are trying their very best with limited resources because Congress has deliberately given them less money in order to try and weaken them. There are powerful interests working against you being protected from the financial wrongdoing.

Now some of you may be asking, wait a minute, didn't this already get fixed? Didn't some kind of financial reform already pass Congress? Uh-huh. A little something called Dodd-Frank. It's named after Congressman Barney Frank and Senator Chris Dodd. It turns two years old this weekend.

I shouldn't call it little. The mammoth bill is more than 2300 pages long. Dwarfing previous financial reform. Born out of the financial crisis, this was an honest attempt to restore the public's trust in the financial system. Now polling suggests that Americans are in favor of the law. Recent survey found voters support Dodd-Frank by a 53-point margin. Not 53 percent, 53 percent more support Dodd-Frank than oppose it. That is a lot of support for a lot of legislation.

Has any of this made you any safer? The nation's largest banks, you know, the ones that were too big to fail? They're even bigger now. They're still making the same risky bets that got us in trouble four years ago. That is something that the Dodd-Frank-Volcker rule was supposed to prevent. It's in here. Named for former Fed chairman Paul Volcker.

The idea is simple. Federally insured banks shouldn't invest their own money to make a profit. But the rule isn't finished yet, an early draft was 298 pages long. And it's got a big loophole in it. Banks can make bets if they're hedging their entirely portfolio.

Let me just help you with this. Remember that $5.8 billion that JPMorgan Chase lost on bad trades? Well, the banks say -- those weren't investments they made for profit, they were hedges intending to protect themselves and their clients. Well, that might be true. Or it might be like me saying I'm not bald, I'm simply hairless.

The bottom line, the almost 300-page Volcker rule contained in Dodd- Frank may not have prevented those losses at JPMorgan Chase. Meantime, any teeth that Dodd-Frank does have are in danger of being pulled. Bills have been introduced in Congress chipping away at these new protections. Lawsuits have been filed against some of its provisions and rule making has buried this thing in stall tactics. The simple fact, people with deep pockets are trying to gut this bill and they have benefactors in Congress. Make no mistake, this is about your money and your prosperity at risk. One of the key parts of Dodd- Frank was the Consumer Financial Protection Bureau which Elizabeth Warren created.

I spoke to the new head of that bureau, Richard Cordray. I asked him if we're any safer today.

(BEGIN VIDEOTAPE)

VELSHI: Is there something that drives you? Is there some enforcement action you'd like to take, the thing that you'd like to fix? I mean you're coming in town. You're the new guy, you're the sheriff. And there are certainly a lot of crimes going on. Is there something you want to nail?

RICHARD CORDRAY, DIRECTOR, CONSUMER FINANCIAL PROTECTION BUREAU: Actually, I want to do something slightly different from that. We have a variety of tools. Enforcement is one of them. We're going to use that tool where it's appropriate.

But if we can work with institutions to get problems fixed through corrective actions, if we can work by providing new clear rules of the road to prevent problems from happening in the first place, if we can educate consumers and get them to muscle up and understand that they also have to protect themselves, and they should take responsibility to do that and we will help them with trusted worth while information.

All of those are ways that we can help clean up this marketplace. Not just with the enforcement tool.

VELSHI: But you'll -- you'll agree with me, I've had I don't know how many mortgages in my life. I couldn't possibly understand my way through it. I mean it is -- it's unreasonably complicated.

CORDRAY: Yes. And part of our job. And it's a hard job, I would agree with you, Ali, is to take those documents, try to boil them down and make it clear to you what are the key points, what should you know and make sure that you can know it ahead of time and make good decisions based on that.

VELSHI: You had an enforcement action against Capital One. It's the first big one that you've had. Tell me where that fits in the grand scheme of what you'd like to do at the CFPB. Is that a -- is that a traffic ticket or is that a major felony?

CORDRAY: I would say it's a property offense and it's, you know, a property offense that's going to amount to approximately $200 million for the institution. One of the things I would, I would note is that the bank officials were just as distressed I think as we were to find out what was happening with their vendors and they were very cooperative in trying to fix the problem once it was identified.

But all these institutions have to exert more careful monitoring over the people who are doing business on their behalf and they need to be cognizant of the fact that they have to treat consumers fairly. That is part of the law. It's not just good business practice, it is part of the law and we're going to make sure people are held accountable for that.

VELSHI: There are still people, Republican senators, who say you and your agency are bad for business in America, bad for banks and bad for business. What's your response to that?

CORDRAY: I think we're good for good businesses and we should be bad for businesses when they're -- when they're doing things that they shouldn't. That's what a fair enforcement regime is about. But I think there are a lot of good businesses out there that will benefit by making sure that their competition is held to the same standard they hold themselves to and it should all be about serving the customer.

You know there was an era where we used to say the customer is always right. It was never really factually true but it represented an attitude, a sort of approach to how you -- how you served your customers. We want to make sure that's returning to this marketplace.

(END VIDEOTAPE)

VELSHI: Coming up next, powerful interests aren't giving up on the fight to kill financial reform. My next guest says the effort to protect you puts banks in a straight jacket. And clearly that's the greater concern, right? We don't want anything that gets in the way of the big banks.

(COMMERCIAL BREAK)

VELSHI: The interests working against keeping your money protected are armed with heavy financial firepower. Hundreds of millions of dollars have been spent first fighting financial reform, and now trying to weaken its implementation. Last year the securities and investment industry spent more than $100 million on lobbying. Commercial banks clocked in at more than $61 million, and that doesn't include campaign donations meant to influence members of Congress or the millions that are spent by independent groups.

Here's what I can't figure out. What makes no sense to me. Why these banks think they shouldn't be regulated? After all they've done wrong, after demonstrating a fascinating ability to avoid regulating themselves, fair and proper regulation is necessary and is something that will only make them stronger. It will save them, in fact, from themselves.

There's one lesson from the financial crisis, it's this. Banks cannot be counted on to effectively manage risk when the payoff for gambling is just too sweet.

Joining me now is Frank Keating. He's the president and the CEO of the American Bankers Association. He's a former Oklahoma governor.

Frank, thank you for being with us. Would the problem be to separate all of those under $1 billion banks that are community banks that give money to small businesses that need to have credit, from the largest of the banks which control so much of the money and are in fact absolutely too big to fail because they would pose a systemic risk to the financial system if they were to fail.

I mean are we -- are we trying to -- I think everybody will agree, there are too many regulators and it's too complicated, but you guys need to be regulated. Your clients do need to be regulating fairly and in an understandable fashion. So how do we do it?

FRANK KEATING, PRESIDENT AND CEO, AMERICAN BANKERS ASSOCIATION: You're right, Ali. I mean the fact is banks have always been regulated.

VELSHI: Right.

KEATING: And that is a healthy thing. Because if I'm a banker and you give me your life savings in a CD, for example, or a savings deposit, that is insured by the FDIC. The bankers pay the premiums to the FDIC.

VELSHI: Right.

KEATING: You want to make sure --

VELSHI: Good system, not very complicated. And you will agree with me, it works.

KEATING: Commercial banking is simple. Now I think to have a flexible system that will respond to the risks that individual banks are taking, either to prohibit those risks or to diminish those risks, to prohibit that conduct, and -- and/or to permit us, the larger institutions, in particular, to compete abroad. I think that's very important.

VELSHI: Sure.

KEATING: You can do dumb things abroad. But again we have a balance of payments surplus abroad and financial services.

VELSHI: Right. But let's --

KEATING: The community banks -- I mean it's crazy with 37 employees to have to read thousands of pages of regulation and conform to every one of them.

VELSHI: Right. But you understand that the American public --

KEATING: We need to be more --

(CROSSTALK)

VELSHI: And Frank, the good thing is that you were a governor so you understand the politics of it, you understand Americans hate the banks. They need the banks. It's important. They do a lot -- a lot of banks do really good things but Americans hate banks. They think the deck is stacked against them, they think they get cheated by the banks and they think the minute you take your eye off the ball, the banks will do something else that's damaging to them and the economy.

So how do we -- how do you -- how do you bridge that gap? How do you say, yes, you know what, left to their own devices, some banks, some banks will do the wrong thing so we need rigorous and good enforcement? Look north to Canada. They -- they manage their banks very, very well and very, very simply.

KEATING: Well, I think that in the United States, the problem -- as you well know, Ali, because you've talked about it, the subprime, the all-paid loan --

VELSHI: Right.

KEATING: -- debacle was the result of political pressure on Fannie and Freddie to buy junk.

VELSHI: Right.

KEATING: And a lot of -- not a lot, but a number of banks, not the community banks but a number of banks did purchase that stuff, securitized it and off it went. It was a terrible blunder on the part of the United States. I mean how many times -- I had nothing to do at that time with the American Bankers Association.

VELSHI: Right.

KEATING: Although my family has been in banking, did I see an ad on television, no background check.

VELSHI: Yes.

KEATING: You know, no credit check, no assets or income, we'll make you a loan. Really. If you're a banker, you want to be paid back. It was silly and it was greed filled. But now I think as a result of the focus on this kind of conduct to have systems in place to protect against risk, to prevent a bank from doing reckless things or an investment bank or a mortgage broker.

VELSHI: Right.

KEATING: I think that's all healthy but it has to be digestible so it is going to work as opposed to being avoided because it's so huge that you can avoid sentences and paragraphs.

VELSHI: Well, this is the point. I -- and I'm holding it in my hand right now. It is so big. What is your proposed solution? Because we don't throw the baby out with the bath water. We worked hard to get this legislation. It was well intended. And you say it's a little bit unworkable for a lot of your banks because it's just a -- I mean how do you -- you have 37 employees and parse this to make it -- make it make sense? What's the solution? Give me a solution.

VELSHI: The free market brought us the financial crisis of 2008. Americans are not interested in hearing that the banks are a free market. Absolutely not.

KEATING: No, no, I realize that. But I'm saying capitalism must succeed in order for people to be prosperous and greed and excess criminality and the like obviously should not be tolerated.

Let me give you the solution, I think. Remember Dodd-Frank had very little Republican support. It was rushed-through 2,000 pages with very little debate. After the fact, certainly either before the election or after the election the Bipartisan Policy Center -- I was on that deficit Rivlin-Domenici panel, very bipartisan consumers.

VELSHI: Yes.

KEATING: Democrats, Republicans and the like. There will be a study, what do we need to do to fixed Dodd-Frank.

VELSHI: Yes.

KEATING: To make the system work, and yet to make sure that excess and greed loses.

VELSHI: Frank, thanks for joining us. Good to talk to you. Frank Keating, the --

KEATING: (INAUDIBLE)

VELSHI: CEO -- president and CEO of the American Bankers Association, the former governor of Oklahoma.

(END VIDEOTAPE)

When we come back, I'll introduce you to one woman who kept your money safe during the financial crisis. I'll tell you how she's protecting your money today. That's next on YOUR MONEY.

(COMMERCIAL BREAK)

VELSHI: I have told you about the people who are standing in the way of your prosperity. Now I want to introduce you to one of the people protecting your money.

Sheila Bair is the former chair of the FDIC and she's been credited with saving the banks during the financial crisis.

Twenty-five banks failed in 2008 alone. There they are. They were taken over by the FDIC. The one you may remember most was Washington Mutual, the biggest bank failure in U.S. history. Now I'll just tell you how these work. While those banks failed the FDIC worked behind the scenes to prevent panic and to keep your money safe. If it happened on Friday night, the FDIC bank closure crews went into failing banks, took them over. By Saturday morning the banks opened under a new name. Maybe it was Monday morning but you never lost access to your money over the weekend. In fact no one has ever lost a penny of FDIC insured money.

Now today Sheila Bair is on a new quest to protect your money. She says regulators are not moving fast enough and that's why she's leading a new effort to eliminate outlandish risks and prevent banks from making bad debts with your money.

Now let me be clear. I like Sheila Bair. I think she is one of the best financial regulators in America's recent history. Some people say she should be treasury secretary.

Let me also say I have spent a part of this show expressing my disdain for Republican senators who stood squarely in the way of protecting your money. So it's fair to tell you that Sheila Bair, who has spent much of her career protecting your money, is a Republican. Financial regulation does not have to be partisan.

Sheila, good to see you. Thank you for being with us.

SHEILA BARI, FORMER CHAIRMAN, FDIC: Nice to see you, Ali. Thank you.

VELSHI: Dodd --

BAIR: Always happy to be here.

VELSHI: Dodd-Frank handed power to regulators, to regulatory agencies, and you say they're not doing their jobs. Why?

BAIR: Well, I think they're not doing their jobs in a way that's muscular enough. Let's put it that way. Only about a third of the Dodd-Frank rule have actually been finalized. So we still have a ways to go and even when they are finalized or proposed they're quite lengthy and complex.

They are hard for the public to understand. They're hard for the media and academics to understand. Those who need to provide some analysis to make sure the regulations are doing their job. And I think one of the reasons for that complexities is all the lobbyists come in and they want this exception or that.

VELSHI: Right.

BAIR: And clarify they can keep doing this. And they're accommodating that and they shouldn't. We need a profound change in the way the financial sector is doing business. They need to just tell these folks no.

VELSHI: The banks that were too big to fail before the financial crisis are even bigger now. In 2006 the top five banks held $6 trillion in assets. And that's 43 percent of America's total economic output as measured by GDP. Last year they held $8.5 trillion in assets or 56 percent of GDP. So they're bigger. Why have the efforts to make banks safer and more manageable come up short?

BAIR: Well, I think we're still working this around the edge instead of tackling the core problems. There have been some constraints on growth. Funding costs have started to go up for the big banks because I think the market does understand that Dodd-Frank does end too big to fail, that they are going to be put into a bankruptcy type process if they get into trouble again. So there has been some progress but it's not been enough.

We need more competition. We need to rationalize these -- big bank structures and provide more clarity, frankly to share holders about how their business lines break out. What's profitable, what's not. I actually think there could be a lot of market pressure to break up these large institutions that do not perform well from a shareholder perspective. But there's -- this is another way that regulators can help provide more information through this living will process that's provided by Dodd-Frank. Dodd-Frank requires these big banks to basically show the regulators that they have break-up plans. That kind of information will be helpful to the markets, too, to try to downsize them because I think everybody agrees they'd be more efficient if they were smaller, too.

VELSHI: You know, banks are important. We need them.

BAIR: Yes.

VELSHI: They serve --

BAIR: We do, we do.

VELSHI: They serve a purpose. But there is an element of trust that is important. And a recent Gallup poll shows that confidence in U.S. banks, consumer confidence in U.S. banks was at 60 percent in 1979. You can see a lot of variation but you can sort of see when the financial crisis hit how it tanked. It now stands at 21 percent, just 21 percent of Americans have confidence in U.S. banks. Do you think that's fair? Should they be more confident?

BAIR: Well, I think if I were a main street household reading the newspapers I would have the same view. My respect for a lot of financial institutions has deteriorated also. I think you need to differentiate the traditional banks, that ones that take deposits and make loans. They are not perfect but for the most part, they're not involved in the scandal you're seeing now. This is bad activity, this going on the trading desks of these larger institutions.

There is a profound cultural problem on these trading desks. They apparently think that their -- the laws don't apply to them or some of them don't. And I think actually that the core problem that needs to be tackled and again regulators are trying to work this too much on the -- on the edges as opposed to jut telling you can't do it this way anymore. The LIBOR scandal is a prime example. Why do -- everybody knew it was subjective.

VELSHI: Right.

BAIR: It was ripe for abuse, why wasn't it fixed when these issues came to the attention of some regulators in 2007 and 2008? I don't get that. But, you know, going forward regulators need to get more muscular and just tell banks they have to stop doing this.

VELSHI: Sheila Bair, always a pleasure talking to you. Thanks for the hard work you put in.

BAIR: You bet.

VELSHI: Protecting people's money in America. Sheila Bait is the former chairman of the FDIC and the founder of Systemic Risk Council. She's also a senior adviser at the Pew Charitable Trusts.

(END VIDEOTAPE)

VELSHI: Coming up I have told you today about how Congress needs to act. I've told you who's standing in your way of prosperity and who's going to protect you. Now it is your turn to tell me what you think. When we come back I will tell you how you and I are going to debate. That's coming up next on YOUR MONEY.

(COMMERCIAL BREAK)

VELSHI: I've told you we're on a nice edge in this economy. Month to month your perception of what 's going on in this economy changes. You saw what happened back in June when gas prices started high and then went down. How tight are we that a 25-cent change in gallon of gas affects your entire outlook, your confidence in the economy? Well, that's where we are. Gas prices have been going up for the last two weeks again. We've had a massive recession in Europe. It's still going on. Slow downs in India and China, it's got to hit us eventually. And I will be screaming from the rooftops if we end up in a recession six months from now because of the nonsense coming out of Congress.

Now if you think with me, you think I'm wrong, tell me. You know I address these things on the show. Find me on Facebook.com/alivelshi or tweet me right now, @alivelshi. But you better be prepared to debate because I read all those tweets and posts and I love to write back.